BUFFETT'S BUYS DRIVE SILVER TO DECADE HIGH; BILLIONAIRE HOLDS FIFTH OF WORLD'S SUPPLY.

Byline: Gregg Stein Associated Press 

A huge endorsement by one of the world's richest investors sent silver prices surging to a 10-year high Wednesday, raising memories of a speculative binge that wound up trashing the metal.

Silver surpassed $7 an ounce for the first time since January 1988 after legendary investor Warren Buffett's company disclosed late Tuesday it had acquired 130 million ounces of silver, now worth $910 million.

Buffett has legions of followers that track his every move, but rarely has the famed advocate of buy-and-hold stock investing steered them to the commodities pit.

``In my opinion, he's saying that common stocks are a bit rich,'' said Michael Metz, chief investment strategist at CIBC Oppenheimer. ``If Mr. Buffett can't find any attractive common stocks, maybe that means you can't either, and should begin taking a look at commodities.''

The silver contract for delivery in March rose 40-1/2 cents Wednesday to close at $7.02 a troy ounce on the New York Mercantile Exchange, giving it a two-day gain of more than 12 percent. Since Buffett's company, Berkshire Hathaway Inc., began buying silver in July, the metal's value has soared 62.5 percent.

Berkshire's stake represents an estimated 20 percent of the world's silver supply, excluding jewelry and other manufactured items.

The developments evoked memories of 1980, when the Hunt brothers of Texas tried to corner the market and drove prices from around $6 an ounce to a high of $52.50. That run-up led people to melt down trophies, sell heirloom place settings and search frantically for old silver quarters.

But when the silver market collapsed just weeks after hitting its peak, the Hunt brothers were left with $1 billion in losses.

Unlike the Hunts, who borrowed heavily on a losing bet, Buffett's company has deep pockets. Silver represents just 2 percent of its holdings.

The current increase comes at a time when precious metals should seemingly be out of favor. Like gold, silver is seen as a hedge against big jumps in inflation or uncertainty caused by world turmoil.

In fact, gold has been languishing around $300 an ounce or lower as inflation remains tame and central banks sell off their holdings. That, too, is a far cry from its 1980 peak of $875.

``Generally silver and gold trade within bands of each other, and its unusual to have this kind of divergence,'' said Robert Brusca, chief economist at Nikko Securities International Inc.

But silver has one advantage over its costlier counterpart: heavier industrial use. For several years, demand from makers of film, jewelry, electronics and even dental equipment has far outstripped production.

According to the Silver Users Association, a Washington-based trade group, an estimated 739 million ounces was consumed last year, while just 570 million ounces of new silver was produced. That means the market is relying heavily on recycled scrap.

Also driving up prices recently have been allegations that a commodities dealer - the one used by Berkshire Hathaway for its silver purchases - conspired with others to manipulate the market.

Phibro Inc. has denied the charges, which were contained in a lawsuit filed last week by a Canadian silver options trader. Berkshire Hathaway owns a stake in Phibro's parent company, Travelers Group.

Berkshire Hathaway, which is about 40 percent owned by Buffett, said it began buying silver last July 25, which then traded at $4.32 an ounce. It said it finished its buying Jan. 12 and has no plans for additional purchases or sales of its holdings.

Buffett's investing savvy has made him one of the world's richest men. Last year's Forbes magazine estimated his net worth at $21 billion, putting him second only to Microsoft's Bill Gates in its ranking of the 400 wealthiest Americans.

CAPTION(S):

Photo, Chart

Photo: Warren Buffett 

Multi-billionaire

Chart: (Color) SOARING PRICE

Silver prices have shot higher on purchases by investor Warren Buffett and on speculation that the metal might be in for another boom time.

Jan. 3, 1997: $4.71

Feb. 4, 1998: $6.93

Associated Press